An alternative to the 1031 Exchange. Thoughts?

[Daniel A.]

I am in the process of selling an older, somewhat run down Victorian-style house. I, of course, want to make the most that I can off the sale and while I am eager to invest in more properties, the town in which I live has one legal professional who does 1031 exchanges. His fee, while less than the amount I would loose to capital gains, is enough to urge me consider other alternatives.

I spoke with a few people who have many more properties than I, and one thread that I've heard is having the buyer buy you another property, then transfer the deed over to you. Of course, assuming you happen across another property that is selling for more than your property is selling, you bring the remaining financing to the deal.

I bring this topic to the BiggerPockets forums to see what thoughts arise. For? Against? I'd love to hear thoughts, explanations, and stories.

Thank you,

Daniel

[Dave Foster]

Thanks for the shout out @Mark H. Porter.  @Daniel A., it's not uncommon for a local attorney or limited practice QI to charge higher than normal fees. They don't have economies of scale and in many cases are learning on your dime.  Here's an article we wrote on pricing practices for BP - https://www.biggerpockets.com/blog/how-much-does-a-1031-exchange-cost.

It certainly doesn't (and shouldn't) break the bank for you.    The scenario that you describe where you actually swap properties with a buyer does not need a Qualified 1031 intermediary.  However the potential for that kind of process to inadvertently cost you far more than the cost of a QI is pretty huge.  For one thing the statute of sec 1031 is a safe harbor.  Use the process and the IRS promises you're fine.  Don't use the process and you're fair game in an audit.  And with the attorney representation cost of one letter you've pretty much eaten up your savings by DIY.

For another the negotiation process around valuations and actual costs can easily lead to nego compromises that burn up your QI savings as well.  

As several have mentioned, the actual location of the QI is irrelevant.  So find a QI with demonstrated experience and lots of references who is more in line price wise with where you want to be.